Gift cards boost profits

Trivia question: What fits in your wallet, costs mere pennies to produce, is the key component in an $80-billion1 market, and was recently worn – as a dress – by a Grammy-nominated singer?

A) Paul McCartney's divorce settlement papers;

B) Autographed Nolan Ryan rookie card;

C) Gift card.

If you answered C) Gift card, you're right. But more importantly, let's hope you're using them in your operation.

Kelis (pictured) wore a dress made from McDonald's Arch Cards in New York City Dec. 13 at McDonald's 'load it, gift it, love it...now wear it' fashion experience. Although the dress is currently being auctioned on eBay, the Arch Card has a lot of staying power for McDonald's.

Kellis, a Grammy-nominated singer, recently wore McDonald's Arch Cards as a dress. The dress is currently being auctioned off on eBay. Photo provided by McDonald's.

Last year, it generated $40 million in December alone.

"People purchase Arch Cards because they are easy to use and more convenient than a credit/bank card for small purchases," saidShannelle Armstrong, U.S. Communications McDonald's USA.

Not only are gift cards more convenient, they make better gifts. According to a Technomic survey, nearly 70 percent of gift-card givers said they were a better choice than regular gifts, and among restaurant gift-card recipients, 97 percent of the recipients hope to receive gift cards again.

"Spending patterns are changing in ways that support the continued growth of gift cards," said Michael Allenson, director of Technomic's Center for Consumer Research. "Consumer acceptance of gift cards, coupled with a growing hunger for 'experiences' rather than things, creates an excellent opportunity for restaurant companies."

One would expect the large chains like Pizza Hut, Starbucks and Papa John's to use gift cards. But many 10- to 100-unit operations, such as eight-unit Brixx Pizza and 20-store Grotto Pizza, boost sales with the cards, too.

Gene Dover, chief operating officer of San Francisco Oven, believes gift cards are simpler to use than cash or gift certificates, and "if they're issued in higher amounts, they can be applied to several visits at the store easily." At San Francisco Oven, card purchases range from $20 to 30, which is about the industry norm.

"We can't actually tell whether customers spend more if they have a gift card," said Patrick Brown, vice president of marketing for Givex, a full-service gift card management company in Toronto. "They may have intended all along to spend more than the value of the card but used it as part of their payment for their meal. I think right now restaurant owners are happy to see that the gift card they buy for a dollar and sell for $20 comes back and has a $50 meal on it."

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Aaron Millstein, spokesperson for Panda Restaurant Group Inc., said gift cards make up less than 1 percent of total sales for the Asian fast-food restaurant chain. But that's a valuable small percentage in the eyes of Panda executives.

"There's a certain group of consumers that expect gift cards, and we think those people — the ones buying the cards — are our biggest fans," Millstein said.

The technicalities

When Firehouse Subs pondered rolling out gift cards, Vince Burchianti, the company's controller, became the lead investigator.

"The first part was to identify challenges that other concepts faced, so we didn't have to deal with them, too," he said.

One of Burchianti's competitor's had challenges integrating gift cards with its POS hardware. Burchianti made sure Firehouse's hardware could load and unload monies. After that, he interviewed his credit card processor and learned their equipment couldn't accept gift cards. So Burchianti hired a different processor to handle gift and credit transactions.

Once the hardware and processor issues were resolved, Firehouse nailed down the accounting procedures, wrote a compliance manual and tested it. After a successful run at 50 stores, the sub chain created two cards: one sporting a fire truck and another showing off a tasty sandwich. Since November, the card has been live at 200 stores. But Firehouse has yet to make a big splash about the program.

"We only did in-house advertising because we wanted to make sure it works," Burchianti said. "Everything seems to be working just fine, so far. We're seeing people coming back and redeeming cards."

Although Firehouse's gift card program is in its infancy, it has big hopes. Burchianti said the chain is already looking at making the cards reloadable via the Internet, a feature top brands like McDonald's, Caribou Coffee and Pizza Hut already offer. Although not every operator can set up programs like these, with a slew of card manufacturers, it's a buyer's market.

Givex's Brown said the cost of gift cards range from 8 cents to 65 cents, based on how many cards you buy and the program options an operator chooses. Those pennies spent per card result in extra sales, said Bud Shaw, vice president of operations services for Back Yard Burgers.

"We've been using magnetic stripe gift cards for several years," Shaw said. "They improve customer loyalty and get us a lot more college students. ... We've found that parents will buy our gift cards and give them to their children in school."

Extra sales and loyalty are not the only benefits of gift cards, Burchianti said.

"Let's say, a customer comes in with a $20 (paper gift) certificate and only buys $7 worth of food, there's no way of making sure he spends that $13 in Firehouse," Burchianti said. "That's where we're seeing gift cards paying off. We know that they have to spend that extra money in our store."

In addition, gift certificates, unlike gift cards, have to be kept under lock and key because they are live currency. Plus, gift certificates are cumbersome: If a customer wants to buy one, he or she has to wait until the manager can unlock the unit securing the certificates, write out the pertinent information, and log the transaction. The fact that they have to be stored out of sight also typically means that they are out of the consumer's mind as well.

Spending patterns are changing in ways that support the continued growth of gift cards

-- Michael Allenson Technomic

In contrast, gift cards do not have any value until they are scanned and activated by the store's POS system.

"From the restaurant end, gift cards are more convenient than paper certificates, and the redeem rate is higher for cards than paper certificates," said Steve Ellis, senior manager of IT for Metromedia Restaurant Group. "A plastic card also offers the benefit of trackability and provides more information on the business, such as how much people tend to spend with a card versus cash, check or credit card."

The future of gift cards

According to the National Restaurant Association's 2007 industry forecast, gift card popularity will continue to grow. The report says one in four operators expect that gift cards will represent a larger proportion of sales in 2007.

Perhaps the only thing that might change in this industry is the card itself.

"The plastic gift card is very popular, almost to the point of being indistinguishable from everything else in our wallets," Brown said. "So we believe people are going to want something different, such as a key fob or an RFID tag for the sake of being different. Gift cards are so commonplace at this point. Everybody loves them, but the sexiness of it is perhaps waning in some places."